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decentralized, fragmented and anonymous. Constructive discussions need to take place with the Information Technology and Consumer Electronics industries to determine how best to develop effective technical solutions to crush online theft of our valuable creative works.

Action: Continuous negotiations must take place to develop technical solutions, which may require legislative enforcement.

There is one truth that sums up the urgency of this request to the Congress to enlist in the battle to preserve and protect an American economic and artistic asset which attracts the enjoyment, the patronage and a most hospitable reception by every creed, culture and country throughout the world.

That truth is: If you cannot protect what you own, you don't own anything.

STATEMENT OF HILARY ROSEN
PRESIDENT AND CEO

RECORDING INDUSTRY ASSOCIATION OF AMERICA
BEFORE THE

COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE

"IS THE MARKETPLACE WORKING TO PROTECT
DIGITAL CREATIVE WORKS?"

MARCH 14, 2002

Thank you for the opportunity to submit for the hearing record our views concerning the protection of digital creative works, and particularly digitally recorded music. We would also like to thank this Committee, under the leadership of Chairman Leahy and Senator Hatch, for its longstanding dedication to ensuring an appropriate level of protection for creative works.

As the Committee knows well, America's copyright industries have led the U.S. economy in contributions to job growth, gross domestic product and exports. Yet the recording industry is suffering - and other content industries may soon be imperiled - by rampant infringing distribution of our works through peer-to-peer systems, other pirate sites and ubiquitous CD ripping and burning technology. The solution lays in common standards enabling the implementation of collaborative technical solutions to stem piracy. Unfortunately, we fear that the marketplace may not be working to provide the incentives necessary for the development of such standards and to restore an appropriate level of effective protection for creative works. Accordingly, we are very interested in exploring with this Committee whether there is something that should be done to adjust the incentives that enable legitimate commerce in copyrighted works.

It is extremely important at the outset of my statement to respond to some of what I have heard from critics of this process. We are not interested in polarizing relationships with the technology industry. Our member companies are working with the technology industry everyday to develop these new businesses. And we absolutely know and appreciate that several of the tech companies have already spent millions of dollars and vast internal resources trying to find solutions to the problems being discussed today. We have always wanted these efforts at content protection to be of mutual benefit. That is the best way to achieve success.

The Marketplace Has Worked to Provide Legitimate Online Access to Recorded Music, But Infringing Services and CD Burning Threaten Legitimate Distribution Channels

For some time, people have been telling our companies to get their music online. Now we've done it. In addition to webcasters and other kinds of services that have

become common, there are now more than half a dozen licensed subscription services in operation, and more are in the works. It seems like hardly a week goes by without reading about another new licensing deal. The marketplace clearly has responded to the demand for digital music by spurring legitimate service offerings. These services have some limitations that the pirate services do not. The pirate services do not pay creators nor seek licenses. These new subscription services have few customers, because they cannot compete with the music available for free using peer-to-peer systems and other pirate sites. The legitimate online music market is unlikely to prosper until something is done about the wholesale piracy enabled by systems like KaZaA and others.

These infringing systems are fueled by music ripped from CDs, and music obtained through these infringing systems is burned onto CDs for physical distribution, with hardware and software products that have become standard equipment on personal computers. The twin threats of infringing services and ubiquitous ripping and burning technology have created a situation where, more and more, consumers obtain music through infringing downloads and CD burning rather than through legitimate channels.

These problems are real and growing. Peer-to-peer systems enable the illegal download of billions of music files every month. And, in a recent survey of active music consumers conducted for the RIAA by Peter Hart Research Associates, 23 percent of the music buyers we surveyed told us that they are buying less music because they're getting what they want for free by downloading and burning. In such an environment, perhaps it is not surprising that last year, record sales were down 10 percent.

The digital revolution holds the promise of exciting new services for consumers as well as economic opportunities for all the affected industries. Unfortunately, the level of piracy that digital technologies has enabled threatens our ability to develop new artists and produce new music and ultimately may result in fewer choices for American consumers. It certainly has had a significant, negative effect on artists, record companies and the thousands of other people who earn their livelihoods from the music industry, whether as performers, composers, distributors, wholesalers or retailers. Thus, we need to explore every avenue possible to protect our marketplace from piracy.

Technological Protection Measures Are Necessary to Inhibit Piracy and Promote Legitimate Commerce, But They Require the Cooperation of the Technology Industries

There are technical solutions to the online piracy problem that will facilitate the growth of a vibrant legitimate marketplace for online distribution of recorded music. Indeed, the adoption of technological protection measures that balance a music fan's interest in personal use with the piracy concerns of the music industry are our best hope to preserve the legitimate music marketplace that has served America so well.

There have been various suggestions of technological measures that, if implemented in the near term, might offer some useful degree of protection against

uncontrolled copying of content. Of course, CDs can be copy protected to inhibit ripping, and some record companies are looking at and testing such technologies. However, the mere protection of CDs alone cannot solve the online piracy problem, because uncontrolled ripping, burning and infringing online distribution are facilitated by computer products and consumer electronics devices that provide easy and open opportunities for digital piracy.

Moreover, the interests of everyone concerned - consumers, copyright owners and software and hardware manufacturers alike – would be best served by common technical standards that could be implemented in interoperable systems. Such standards would prevent consumers from being confused or aggravated by incompatible systems. Such standards would foster a legitimate marketplace for the distribution of copyright owners' works. And such standards would ensure that software and device manufacturers need only build certain technology into their products to provide access to works obtained through legitimate channels while helping control infringing distribution.

Thus, what is needed are common standards for collaborative technical solutions, in which technology on a disc or a download and technology in other software or hardware products work together. Such collaborative solutions could make a meaningful dent in online piracy. For example work could progress on perfecting how hardware and software devices treat copy protected CD's or downloads. We have always been willing to find the right technology balance between a music fan's personal use and still prevent a song from being sent to millions on the Internet. CD-Rom drive makers could be part of a productive solution. The analog circumvention issue has not been adequately studied for a solution either.

With the right kind of commitment, [voluntary] standards along these lines could be developed and implemented. We should emphasize that we have no desire to stifle innovation by technology companies or inhibit the legitimate use of new technologies to enjoy music. We embrace new technologies that allow us to create and distribute our works and reach consumers in new ways. Thus, we are eager to work with technology companies to formulate standards that will help end the bite of online piracy while at the same time facilitating the growth of a vibrant legitimate marketplace for online distribution of recorded music.

Infringing Services Have Eliminated the Incentives for Technology Companies to Protect Our Content to Further Their Own Business Interests

Since many have used the music industry as an example, we thought we would offer some history of some of the specific actions we took several years ago to try and address the issues. Obviously those efforts mostly failed and we are where we are. Hopefully, our experience is instructive.

We recognized long ago that all the participants in the digital music value chain, including not only creators and distributors of music but also the full range of technology companies, could benefit from common standards enabling the implementation of

collaborative technical solutions in interoperable systems. We tried to do something about this on a voluntary, multi-industry basis through the Secure Digital Music Initiative ("SDMI").

SDMI was a forum for diverse companies that can come together to better understand the others' perspectives, needs and desires in the hope that we could emerge with consensus security standards that would make everyone a winner. We organized SDMI to enable new business models for the legitimate distribution of recorded music while achieving technological protection against piracy. Technology companies participated in SDMI on the premise that they would be able to sell new products and services to enable consumers to get access to music online. In other contexts, such as DVD, these complementary goals of copyright owners and technology companies have led to standard-setting successes.

Unfortunately sometimes agreeing on standards for security and interoperability means choosing some winning technology and making sure there is cross licensing. That was inevitable in this case because a hardware or chip maker cannot be expected to include too many "readers" or decoders in their equipment to react to, and software manufacturers will only accept so many different DRM's. Content developers cannot imbed an unlimited amount of watermarks in their music or movies other content to react to multiple systems. So we tried, with great difficulty, to agree on some proprietary technology that would be interoperable.

Ultimately, SDMI stalled when technology companies discovered that, because of piracy, all recorded music was readily available online even in the absence of security standards. Given all of the proprietary interests of the tech industry, the only format everyone agreed to make their machines interoperable for was the unsecured mp3 format. Since every player and machine could read and play it, it became the de facto standard. In a world in which consumers could get for free all the music they could possibly want, there is no longer any incentive for technology companies to protect our content in order to serve their own business interests, because their products and ISP services are selling, even though those products and services are being used to acquire intellectual property illegally. If we could have kept working together, I know we would have done better at finding solutions. In sum, we just couldn't keep them at the table.

If the Government Can Help With Security Standards, We're Very Interested

Because of the effects of piracy on the incentives that have led to successful standard setting in other contexts, the marketplace presently does not appear to be working to protect digital music. And while we may be the first industry to suffer the ravages of online piracy, we won't be the last - unless something is done to encourage the kind of technical solutions that can actually deal with the problem.

The private sector should be given every reasonable opportunity to adopt appropriate technological solutions. And the government has already provided some